Through the Ujwal Discom Assurance Yojana (UDAY), the government aims to clean the mess in distribution companies and fix last mile distribution issues to realise the ‘24×7 power’ dream. Despite the rise in generation capacity over the years, there is weak demand for power, especially from distribution companies (discoms) due to deteriorating finances. Poor financial health of discoms and their inability to abide by tariff agreements are some of the main causes of poor physical performance of private power projects in the country. The robust capacity addition that the government has been boasting of has actually aggravated the problem as several independent power producers (IPPs) have been forced to scale down output as demand continues to be muted.

A revival plan has been mooted for State Electricity Boards (SEBs) by the government for the third time in 13 years, all of this for the downstreamend of the electricity sector that has been reeling on account of the politics of free power, repressed tariffs and power thefts. In contrast to the previous two attempts to revive the discoms, the latest package by the government attempts to overtly shift the cost of non-compliance of reforms measures to the state governments.

The earlier two bailouts have failed miserably with losses of various discoms amounting to Rs 3.8 lakh crore (figures furnished by Ministry of Power) and the Reserve Bank of India pointing out in its Financial Stability Report of June 2015 that Rs 53,000-crore exposure of banks to seven state electricity boards had a “very high probability” of turning into non-performing assets (NPAs) by the quarter ending September.

Although the eight states—Andhra Pradesh, Bihar, Haryana, Jharkhand, Rajasthan, Tamil Nadu, Telangana and Uttar Pradesh—which accounted for 80% of the accumulated debt adopted the plan, they failed to meet the performance criteria. Thus, the situation continues to be grim, with the outstanding debt of discoms estimated at more than Rs 4 lakh crore, increasing by Rs 60,000-70,000 crore every year. This is one of the factors contributing to the deterioration of asset quality of state-owned banks, whose NPAs are estimated at 5.2% of their lending portfolio.

The Power ministry’s new ambitious plan to revive ailing discoms is a step in the right direction with even private distribution companies expressing willingness to come on board. Provided, of course that all states sign up for it and it is implemented in both letter and spirit. The key to the success of the scheme is acceptance and implementation by state governments.

Ujwal Discom Assurance Yojana (UDAY) may seem a more comprehensive scheme than any other SEB restructuring scheme seen till date. It talks about cost-side efficiency such as an immediate reduction of interest service burden, reduction in fuel cost through coal swapping, time-bound loss reduction, etc. On the revenue side, it talks about a strict discipline of quarterly fuel cost adjustment, annual tariff increase, taking regulators on board and finally including discom losses in the Fiscal Responsibility and Budget Management (FRBM) limits for the states.

UDAY focuses on four major initiatives to improve the operational efficiencies of discoms; reduce the cost of power; reduce the interest cost of discoms and enforce financial discipline of discoms through an alignment with state finances. UDAY aims to relieve the heavily debt-burdened power distribution companies of their huge losses and enable them to get fresh loans and become solvent. It also lays out a road map of how this will be achieved. But does this scheme also have the same political risks as the earlier ones?

According to the plan cleared by the Cabinet, states will have to take over 75 per cent of the SEBs’ loans as of 30 September 2015, by FY17-end, and 50 per cent by the end of March 2016 itself. The cost of this takeover will not be factored in for the states’ FRBM limits for the current fiscal and the next. The states will have the facility of a concessional interest rate of about 9 per cent in servicing the loans, compared to the present 13-14 per cent interest rate on SEBs’ outstanding debt.